Deutsche Bank - PDF document

Deutsche Bank Research Emerging Markets Special Report Economics Commodities Energy Date 16 October 2014 EM oil producers: breakeven pain thresholds ________________________________________________________________________________________________________________ Deutsche Bank AG/London DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014. Robert Burgess Chief Economist (+44) 2 0 7547 - 1930 robert.burgess@db.com Yaroslav Lissovolik Chief Strategist (+7) 495 933 - 9247 yaroslav.lissovolik@db.com Artem Zaigrin Research Associate (+7) 495 797 - 5274 artem.zaigrin@db.com Armando Armenta Economist (+1) 212 250 - 0664 armando.armenta@db.com Oil prices have fallen by over 20% in the last few months, which inevitably raises questions about the ability of major oil producers to withstand a sustained period of lower prices. The price of oil needed to balance their budgets is one useful measure of their respective pain thresholds. We hav e , therefore , updated our assessment of these breakeven prices for ma jor EM producers. In sum, these latest estimates suggest that the (Brent) spot price is now below the level needed to balance the budget in Bahr ain ($136bbl), Oman ($101bbl), Saudi Arabia ($99bbl), Nigeria ($126bbl), Russia ($100bbl), and Venezuela ($ 162 bbl). Within this group, Saudi Arabia has a substantial stock of assets that would enable it to withstand lower oil prices for a sustained period without necessarily needing to borrow or tighten policy. The same is true to a lesser extent for Ru ssia. But Nigeria would exhaust its limited oil savings well within a year at current prices in the absence of any adjust ment. Venezuela has no meaningful cu shion to absorb this shock. Elsewhere, breakeven prices remain below the spot price in Kuwait ($75bbl) , Qatar ($71bbl) , and United Arab Emirates ($80bbl) . Budget breakeven prices: Source: Deutsche Bank estimates The rest of this note describes in a little more detail the basis for the changes in our e stimates in the major countries since we last published our detailed annual assessment on breakeven prices (see our April EM Monthly) . We also provide preliminary estimates of breakeven prices for next year.  Russia . Since we last estimated the breakeven price for Russia, weaker economic growth has begun to squeeze non - oil revenues, and oil and gas production has declined a little, but the depreciation of the rouble has boosted the local cu rrency value o f oil revenues . The net impact of these competing forces has been to leave our breakeven estimate for this year more or less unchanged at $100bbl. The budget for next year is still under discussion, but the preliminary indications are that spending levels will be significantly higher as the government looks to stimulate a flagging econom y. Based on the government’s RUB /USD assumption of 37.7 for the year, this would push the breakeven price up a little to $105bbl in 2015. There are risks on both sides: i f R UB /USD remained over 40, the breakeven 16 October 2014 Special Report: EM oil producers: breakeven pain thresholds Page 2 Deutsche Bank AG/London price wo uld dip slightly below $100bbl; on the other hand, further weakness in non - oil revenues could push the breakeven price upwards.  Saudi Arabia . Oil production is a little weaker than we had anticipated earlier t his year and we have accordingly revised up our breakeven price for this year to $99bbl from our April estimate of $93bbl. Assuming relatively stable production but further moderate real increases in public spending would push this breakeven price to $104b bl next year. The breakeven price would be higher still if Saudi Arabia cuts production significantly in response to lower prices.  Other GCC. Oil production has al so been a bit lower elsewhere in the GCC countries , and public spending has been higher than we anticipated in Oman and UAE, pushing up their breakeven prices relative to our earlier estimates.  Nigeria . We continue to expect the breakeven price in Nigeria to drop this year and next, to $126bbl and $123bbl respectively, largely as the significant depletion in oil savings that took place last year enforces some fiscal consolidation. This assumes that the naira remains broadly unchanged from current levels. A weaker currency would reduce this breakeven price, though we estimate that it would take an 18% devaluation to bring the breakeven price below $100bbl and a 32% devaluation to bring it to the current spot price of $83bbl.  Venezuela . It’s difficult to pin down the fiscal numbers in Venezuela with any degree of precision in the absence of publishe d budget data. But after a revision to our projections on expenditure , and the inaction of authorities in correcting the external imbalance through devaluation , we now estimate that the breakeven price for this year is somewhere around $160 bbl . Even if we assume a devaluation of the exchange rate from the current official rate of VEF/USD of 6.3 to 15.0, boosting the local currency value of oil revenues, the breakeven price would still remain around $117bbl. Even through the breakeven price in several count ries is above the current spot pri ce in many cases, substanti al cushions of oil savings would enable some of these producers t o adjust only very gradually to a sustained period of lower oil prices. At th e current spot price of $83bbl, for example, the Saud i government would run a significant budget deficit next year . But it also has a substantial stock of assets, almost $450bn, enough in theory to cover the resulting deficit for 7 - 8 years without adjusting (nominal) spending levels. The same is true to a le sser extent for Russia: its oil savings funds of $170bn could fund the deficit that would emerge at current oil prices for 3 - 4 years. Nigeria’s modest oil savings of $4bn , however, would run out well wi thin a year at current prices. Government assets as a buffer against lower oil prices Source: Deutsche Bank 16 October 2014 Special Report: EM oil producers: breakeven pain thresholds Deutsche Bank AG/London Page 3 Appendix 1 Important Disclosures Additional information available upon request For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look - up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst( s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Robert Burgess/Yaroslav Lissovolik/Artem Zaigrin/Armando Armenta 16 October 2014 Special R eport: EM oil producers: breakeven pain thresholds Page 4 Deutsche Bank AG/London (a) Regulatory Disclosures (b) 1. Important Additional Conflict Disclosures Asi de from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. (c) 2. Short - Term Trade I deas Deutsche Bank equity research analysts sometimes have shorter - term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com . (d) 3. Country - Specific Disclosures Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financi al Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analy st(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparatio n of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures . Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securitie s Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Ja pan, Japan Investment Advisers Association. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain categories of investment advice, products and services. Recom mended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products a nd/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless "Japan" or "Nippo n" is specifically designated in the name of the entity. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia: This information, interpretatio n and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 070 73 - 37) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia. United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Bo x 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority. (e) Risks to Fixed Income Positions Macr oeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in in terest rates naturally lift the discount factors applied to the expected cash flows and thus cause a 16 October 2014 Special Report: EM oil producers: breakeven pain thresholds Deutsche Bank AG/London Page 5 loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in infla tion, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for d ifferent types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates - these are common in emerging marke ts. It is important to note that the index fixings may -- by construction -- lag or mis - measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short - dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements. David Folkerts - Landau Group Chief Economist Member of the Group Execut ive Committee Guy Ashton Global Chief Operating Officer Research Marcel Cassard Global Head FICC Research & Global Macro Economics Richard Smith and Steve Pollard Co - Global Heads Equity Research Michael Spencer Regional Head Asia Pacific Research Ralf Hoffmann Regional Head Deutsche Bank Research, Germany Andreas Neubauer Regional Head Equity Research, Germany Steve Pollard Regional Head Americas Research International Locations Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Philli p Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234 Deutsche Bank AG Große Gallusstraße 10 - 14 60272 Frankfurt am Main Germany Tel: (49) 69 910 00 Deutsche Bank AG Filiale Hongkong International Commerce Centre, 1 Austin Road West,Kowloon, Hong Kong Tel: (852) 2203 8888 Deutsche Securities Inc. 2 - 11 - 1 Nagatacho Sanno Park Tower Chiyoda - ku, Tokyo 100 - 6171 Japan Tel: (81) 3 5156 6770 Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) 20 7545 8000 Deutsche Bank S ecurities Inc. 60 Wall Street New York, NY 10005 United States of America Tel: (1) 212 250 2500 Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsch e Bank"). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information . Deutsche Bank may engage in securities transa ctions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In additio n, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this repo rt. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deuts che Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event tha t any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financ ial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an o ffer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. T arget prices are inherently imprecise and a product of the analyst judgement. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transacti ons can l ead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect th e investment. Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis. Prices are current as of the end o f the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other ven dors. Data is sourced from Deutsche Bank and subject companies. Derivative transactions involve numerous risks including, amo ng others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by i nvestors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities and as such investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication. Trading in options involves risk an d is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options," at http://www.theocc.com/components/docs/riskstoc.pdf . If you are unabl e to access the website please contact Deutsche Bank AG at +1 (212) 250 - 7994, for a copy of this important document. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of l everage obtainable in futures and options trading losses may b e incurred that are greater than the amount of funds initially deposited. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor 's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and authorized by the BaFin. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deut sche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles Quay #18 - 00 South Tower Singapore 048583, +65 6423 8001), and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where th is report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore l aws and regulations), Deutsche Bank AG, Singapore Branch or Deutsche Securitie s Asia Limited, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report i s approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the p rovision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) rela ting to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire t he product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this repo rt is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting. Copyright © 2014 Deutsche Bank AG